Sector ETF Rankings: Chips and Dips Rise to the Top

by: David Trainer

The con­sumer sta­ples and infor­ma­tion tech­nol­ogy sec­tors win the best pre­dic­tive rat­ings among the ten major sec­tors. Both get our “attrac­tive” rat­ing. Our Sec­tor Roadmap report ranks and rates all of the 10 sec­tors. It also bench­marks all sec­tors against the S&P 500, which gets our “neu­tral” rat­ing and the Rus­sell 2000, which gets our “dan­ger­ous” rating.

Being the only attractive-rated sec­tors means that the con­sumer sta­ples and infor­ma­tion tech­nol­ogy sec­tors have the best quality-of-earnings and val­u­a­tion of all sec­tors. This means they also have the most mar­ket value allo­cated to stocks with high qual­ity of earn­ings and cheap valuations.

The finan­cials sec­tors is the worst-rated sec­tor and is the only sec­tor with ETFs that get a “very dan­ger­ous” rat­ing. It also has the most “dangerous-rated” ETFs.

Not sur­pris­ingly, the con­sumer sta­ples and infor­ma­tion tech­nol­ogy sec­tors also have the most attractive-rated ETFs and the least dangerous-or-worse-rated ETFs. Fig­ure 1 shows the rat­ings of the 155 ETFs we cover within each sec­tor. In total, we cover and pro­vide pre­dic­tive rat­ings on about 400 US equity ETFs.


Fig­ure 1: Pre­dic­tive ETF Rat­ings by Sector

Sources: New Con­structs, LLC and com­pany filings

The two sec­tor ETFs with the best invest­ment poten­tial come from the con­sumer sta­ples sector:

  1. Con­sumer Sta­ples Select Sec­tor SPDR (NYSEARCA:XLP)
  2. Rydex S&P Equal Weight Con­sumer Sta­ples ETF (NYSEARCA:RHS)

Both of these ETFs ben­e­fit from hold­ing “very attrac­tive” stocks: Phillip Mor­ris (NYSE:PM) and Wal-Mart (NYSE:WMT).

The top two infor­ma­tion tech­nol­ogy sec­tor ETFs are:

  1. Direx­ion Daily Tech­nol­ogy Bull 3X Shares (TYH)
  2. ProShares Ultra Tech­nol­ogy (NYSEARCA:ROM)

Both of these ETFs ben­e­fit from hold­ing “very attrac­tive” stocks: Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG).

The worst-rated ETFs are, not sur­pris­ingly, in the finan­cials sector.

  2. iShares Dow Jones U.S. Regional Banks Index Fund (NYSEARCA:IAT)

Both of these ETFs’ rat­ings are hurt by hold­ing lots of “very dan­ger­ous” stocks, such as JPMor­gan Chase (NYSE:JPM) and Cit­i­group (NYSE:C), and “dan­ger­ous” stocks, such as US Ban­corp (NYSE:USB) and Sun­Tr­sut Banks (NYSE:STI).

As detailed in our reports on the “Best & Worst ETFs” for each sec­tor, there are alarm­ing dif­fer­ences in the num­ber of hold­ings and sizes of allo­ca­tions to stocks by ETFs within the same sector.

Investors must ana­lyze all of the hold­ings of an ETF or mutual fund to ensure they are mak­ing smart invest­ment decisions.

Tra­di­tional fund research pays lit­tle atten­tion to the qual­ity (or lack thereof) of the hold­ings of a fund. So, investors need to beware of the fact that tra­di­tional fund rat­ing sys­tems are not pre­dic­tive or intended to be pre­dic­tive despite the com­mon per­cep­tion otherwise.

Our rat­ings on funds and sec­tors are pre­dic­tive and are just like our stock rat­ings. We mea­sure the qual­ity of earn­ings and val­u­a­tion of funds and sec­tors by aggre­gat­ing our mod­els for all the stocks within each funds and sec­tor. We weight the results of the mod­els accord­ing to mar­ket value for sec­tor; for funds we weight results of mod­els accord­ing to the funds’ allo­ca­tions to each holding.

Disclosure: I am long WMT, PM, GOOG, AAPL.